Understanding the U.S. Marginal Tax Rate

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Marginal Tax Rate Explainer

The U.S. tax system is designed to be progressive, meaning that higher-income individuals generally pay a larger percentage of their income in taxes. As you make more income, you are taxed at progressively higher tax rates. However, public understanding of how this system works, particularly concerning marginal tax rates, is often limited. This explainer aims to clarify the concept of the marginal tax rate and address common misconceptions.

What is the Marginal Tax Rate?

It is a common misconception that your entire income is taxed at a single rate. People often think of the marginal tax rate as “the tax rate,” as if it were one flat tax rate applied to your entire income. However, that is not how it works. To really understand how your income tax is calculated, you need to understand marginal tax rates and the concept of graduated tax rates. The marginal tax rate is the rate applied to a specific portion of your income that falls within a particular tax bracket. Think of it this way: as your income increases, it may cross into higher tax brackets. The marginal tax rate is the rate at which any additional income within that specific bracket is taxed.

Graduated Tax Brackets: How the System Works

The U.S. federal income tax system employs a graduated tax bracket system. This means that instead of a single tax rate, income is divided into multiple ranges, or “brackets,” and each bracket is taxed at a different rate, each being a progressively higher rate ensuring that high income earners make larger contributions to Federal Revenue.

Here is how the US graduated Income Tax system works:

• Brackets: Income levels are broken into a range known as a bracket with a start and ending point for each range of income. For example, $0 – $10,000, and $10,001 – $20,000 would each be their own Bracket.
• Multiple Income Brackets: The tax table is composed of multiple tax brackets with ranges starting at zero escalating through different graduated tiers and ending in infinity.
• Increasing Rates: Each bracket is assigned a specific tax rate, and these rates generally increase as the income level rises.
• Income Within the Bracket: Only the portion of income that falls within a particular tax bracket range is taxed at that bracket’s rate.

US Tax Bracket

The US Tax Bracket is a table with a set of Tax Ranges for a given filing status with a progressive rate for each corresponding income level as follows in Table 1.

How to use Tax Brackets

Using an example of a married couple with combined gross income of $120,000. After eligible deductions and exemptions their adjusted gross income (AGI) is $100,000. Using the Tax Bracket in Table A above, they would use the center column for Married Individuals Filing jointly and apply tax rates as follows in Table 2 below.

What Does the Marginal Tax Rate Apply To?

Marginal tax rates are applied to a taxpayer’s taxable income. Taxable Income is not the same as Gross Income. Your entire income is referred to as your Gross Income. This is your total income before deductions. After you have subtracted all applicable deductions and exemptions from your Gross Income this is referred to as your Adjusted Gross Income (AGI). Your AGI income is what is taxed at the tax bracket rates. So, you are taxed on only a portion of your income, and each portion of that income is taxed at a different rate according to each bracket’s tax rate.

Marginal Tax Rate vs. Effective Tax Rate

Another important concept to understand is to distinguish between the marginal tax rate (MTR) and the effective tax rate (ETR):

• Marginal Tax Rate (MTR): The tax rate applied to a portion of income within a specific tax bracket.
• Effective Tax Rate (ETR): The total tax liability divided by total income.

In our example illustrated in Table 2 the Married Couple earning $120,000 whose top income falls in the 22% Marginal Tax Rate (MTR), they are often referred to as being in the 22% tax bracket. This is often where the misconception comes, if your Adjusted Gross Income on $120,000 of income is $100,000 than if you are in the “22% tax bracket”, they should pay $26,400 ($120,000 * 22%). However, because of the graduated tax bracket system, the ETR is always lower than the highest MTR a taxpayer faces. Here is why: The ETR represents the average tax rate on all of a taxpayer’s income AFTER eligible deductions and exemptions against their total tax liability. Since different portions of their income are taxed at different rates (as determined by the tax brackets), the overall tax burden, expressed as a percentage of total income, will be less than the rate applied to the very highest portion of their income, most often referred to as their tax bracket. So, in our example in Table 2, the married couple with $120,000 in gross income has a tax liability of $11,828. Therefore, their Effective Tax Rate (ETR) is only 9.86% ($11,828/$120,000) instead of the “22% tax bracket” of their highest Marginal Tax Rate. This is because the Gross Income is reduced by eligible deductions and exemptions to produce an Adjusted Gross Income BEFORE it is exposed to the tax bracket, and that the graduated tax bracket only exposes a portion of the AGI to each graduating tax bracket rate.

Misconceptions About Marginal Tax Rates

A prevalent misunderstanding is that a taxpayer’s entire income is taxed at their highest marginal tax rate. This leads to the incorrect belief that tax increases on higher income brackets affect all of a taxpayer’s earnings.

Many people mistakenly believe that their entire income is taxed at the rate of their highest tax bracket. They do not realize that the graduated tax system means that only the portion of their income that falls within each bracket is taxed at that bracket’s rate. This misunderstanding leads to an overestimation of their tax liability. The effective tax rate is always lower than the marginal tax rate because it averages the different rates applied to different portions of income.

To reiterate, in a graduated system, taxes are calculated incrementally. Only the income within a specific range is taxed at the rate assigned to that range, and only after Gross Income has been reduced by eligible deductions and exemptions. Higher marginal tax rates do not apply to all income, only to the portion exceeding lower-bracket thresholds.

Tax Brackets Over Time

Since the ratification of the 16^th Amendment in 1913 that allowed progressive taxation and the introduction of a Federal Income Tax, the US Tax Bracket has had a number of changes.

Changes

• The Top Marginal Income Tax Rate has varied from a low of 7% to a high of 94%.
• The number of Tax Brackets has varied from a low of 2 (1988-90) up to 56 (1918).

• Income thresholds are adjusted periodically for inflation to prevent  “bracket creep” [1].
• Filing status significantly impacts income thresholds.

In Diagram 1 we show the Top Marginal Tax Rate by year. This applies to the highest income earners only, and only to the portion that falls within the income levels of the top marginal tax bracket.

Taxpayers in the Highest Marginal Tax Bracket

The Top Marginal Tax Rate is often referenced when discussing Taxes and this can be misleading. As we have discussed we know that the top MTR is only applied to the AGI which can vary substantially from different from Gross Income, and the ETR is often substantially less. Historically, the number of taxpayers in the highest marginal tax rate bracket has been relatively small compared to the total taxpayer population.

Tax data and analysis indicate these general trends:

• A small percentage of taxpayers fall into the highest tax brackets [2].
• The majority of federal income tax revenue is concentrated among the highest-income earners [3].
• The number of individuals and households affected by the top tax rate varies due to economic conditions and legislative changes.
• Very high top marginal tax rates occurred during periods of high government expenses, including wars, as seen during World War II. While the top marginal tax rate reached 94%, it applied to a very limited number of high-income individuals [4].

Conclusion

The marginal tax rate is a fundamental element of the U.S. progressive income tax system. However, its application is often misunderstood. The graduated tax bracket system ensures that a taxpayer’s effective tax rate is lower than their highest marginal tax rate. So, when someone discusses their “Tax Bracket” and expresses it as a single value, this is higher than their Effective Tax Rate due to deductions, exemptions, and the graduated tax bracket. Understanding these concepts is crucial for accurate discussions about tax policy, your contributions, and its impact on individuals and the economy.

References

1. Tax Foundation – Graduated Rate Income Tax | TaxEDU Glossary. https://taxfoundation.org/taxedu/glossary/graduated-rate-income-tax/
2. Cato Institute – It’s Tax Season—Five Charts on Who Pays and What’s at Risk | Cato at Liberty Blog. https://www.cato.org/blog/its-tax-season-five-charts-who-pays-whats-risk
3. Tax Foundation – Summary of the Latest Federal Income Tax Data, 2025 Update. https://taxfoundation.org/data/all/federal/latest-federal-income-tax-data-2025/
4. The Concord Coalition – Historical Tax Rates: The Rhetoric and Reality of Taxing the Rich. https://www.concordcoalition.org/deep-dives/issue-brief/historical-tax-rates-the-rhetoric-and-reality-of-taxing-the-rich/